Labour delegates hailed a new deal on rail policy as the "beginning of the end of Tory privatisation" as the party agreed to review the entire "failed" franchising system and to allow let public sector operators to compete to run services.

After negotiations at its policy forum in Milton Keynes, the leadership, unions and delegates hammered out a compromise that will put far-reaching rail reform at the heart of Labour's election manifesto.

Supporters for a bold approach from Ed Miliband secured a commitment to "reverse the presumption against the public sector" in the running of services, implying a new role for the state in overseeing services.

Under the agreement, Labour will conduct a review into a franchising system which it says has let down passengers with poor value for money and some of Europe's highest fares.

Sources said a Labour government would bring new legislation and the scrapping of the 1993 Railways Act, which laid out the framework for the private sector to take on rail franchises. Miliband had feared the issue would be put to a vote if a deal was not struck with delegates, and he might lose if he backed away from radical options. But the wording was toughened up to stress the public sector's role while condemning "Tory dogma on privatisation".

Miliband said the East Coast main line had operated well under public ownership after the private company that ran it had to pull out. "We know East Coast has worked in public hands, so on the basis of value for money let's extend that idea and let the public sector challenge to take on new lines," he said. "Let's end the situation where you can be a European public rail company and run lines, but not if you are a public operator from Britain.

"Let's together set a new course for our railways which will be better for the taxpayer and properly serve passengers."

Instead, the public sector will be able to compete under a new tendering or franchising process yet to be determined. Labour will set up a new body to coordinate rail strategy and determine national policy on fares. There will be a legal obligation on all rail operators to give passengers the lowest available fares. "Make no mistake, if we win this is the beginning of the end of what the Tories did, the beginning of the end of privatisation," said one delegate close to the talks.

Miliband said the plan was part of a "new settlement" between Labour and the British people, under which it would pursue radical options to reduce inequality without returning to "big spending".

It was, he claimed, "a plan for economic transformation, a new settlement that is not less ambitious because we live in a time of scarcity, but is more radical, more ambitious because it sets a new direction for Britain".It was "moving on from New Labour" but "not going back to old Labour".

Looking ahead to next year, Miliband said: "At this election, the public will have the chance to vote for a changed Labour party with a programme to change the country."

That included "a higher minimum wage; stopping the abuse of zero-hours contracts; skills and careers for all our young people; banks working for businesses again; energy bills frozen; 200,000 homes built a year by 2020; power devolved; the bedroom tax abolished; and our National Health Service restored".